Quantifying Comcast's Monopoly Power

from the merger-scrutiny dept

Comcast is a monopoly. The question is, how much of a monopoly is Comcast, and how much of a monopoly will it be after it absorbs Time-Warner Cable (TWC)?

To help quantify market influence, economists use the Herfindahl–Hirschman Index (HHI), a metric that is calculated by adding the squares of the market shares of every firm in an industry. HHI produces a number between 0 (for a perfectly competitive industry) and 10,000 (for an industry with just one firm).

For HHI calculations, the question becomes: a percentage of what market? Discussions of the Comcast-TWC merger have often noted companies' shares of both the broadband and cable TV markets are comparable. Although their market shares in Internet and TV are similar, the difference in importance between the two markets cannot be overstated. Residential broadband is how every person reaches the Internet. In time, the Internet will become the way to reach almost all content.

By contrast, cable television is close to being an anachronism. Companies like Netflix, Amazon and YouTube (Google) already provide most of what cable television offers. In addition, new technology—Internet technology—allows much greater flexibility in the content consumers choose. Consumers do not need to subscribe to individual channels or watch advertisements—at least not to the extent they used to.

Because of how important the Internet is, the Comcast-TWC merger is primarily about broadband, not cable television. So the question is, what share of the high-speed Internet service will Comcast have? According to Free Press, Comcast-TWC would have 47% of truly high-speed broadband service. This figure is extremely conservative. It ignores that the Comcast-Verizon duopoly has many methods at its disposal—most importantly, dividing up geographic markets ("I'll take Philadelphia, you take New York") and dividing up entire industries ("I'll take residential broadband, you take wireless").

Comcast's CEO has admitted that Verizon FiOS is Comcast/Time-Warner's only competitor in high-speed Internet service. And, Comcast has admitted that it has 40% of the high-speed broadband market. Comcast-TWC would have a subscriber base that reached 70 million, and, according to CableTV.com, Comcast-TWC service would be available to 70% of the United States. According to WSJ, More than 61% of consumers would have one cable company serving them.

These figures do not take into account regional dominance, which means that they dramatically underestimate the limited consumer choice and market consolidation across industries. Competition (or lack thereof) in geographic markets is extremely significant. Here, by Comcast's own admission, pre-merger Comcast and Time-Warner did not compete in any markets.

In addition, Comcast's national market share does not take into account market share in related markets—which present additional anticompetitive harms, but are not factored into the HHI calculation. For Comcast, its market share ignores its interest in Hulu, NBC Universal, and other content industries. In addition, Comcast ties its high-speed broadband connections to cable television and landline phone service—another factor not taken into account in the HHI calculation.

Recall that markets with a Herfindahl–Hirschman Index (HHI) between 1500 and 2500 are problematic; above that, the market is consolidated. Therefore, Comcast's admission of 40% market share automatically puts the Internet service market into the middle category of a "moderately concentrated" industry. In other words, without factoring in the market share of Comcast's competitors, and using Comcast's own figure, there is still limited competition in high-speed Internet service.

This market share calculation also ignores the effect of dominating local markets, the tying of television and phone service, and the business interest in competing content industries. In short, a raw calculation of market share ignores market power.

Comcast has argued that—regardless of the competitive landscape in Internet service and cable television—the merger will not result in "merger-specific" harm. That is, the Internet may already be monopolized, but allowing it to acquire Time-Warner Cable will not make it any worse.

When analyzing merger-specific harm, antitrust law puts substantial weight on whether a "significant" competitor will be eliminated and how the merger will affect market concentration:

Mergers resulting in highly concentrated markets that involve an increase in the HHI of between 100 points and 200 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers resulting in highly concentrated markets that involve an increase in the HHI of more than 200 points will be presumed to be likely to enhance market power. The presumption may be rebutted by persuasive evidence showing that the merger is unlikely to enhance market power.

According to conservative estimates, Time-Warner has about 13% of broadband customers in the U.S. That means that the increase in HHI resulting from the merger is 169 points. According to the Merger Guidelines, Comcast's acquisition of Time-Warner Cable would "raise significant competitive concerns and warrant scrutiny," even if Comcast didn't have dominant market share (which it does). Scrutiny of the deal reveals that Comcast-TWC would have significant leverage in other industries: cable television, content (such as sports), and phone service.

Acquisitions involving a firm with a majority stake are almost always anti-competitive, because, by definition, they occur in a concentrated industry and result in the largest firm gaining market share. When a merger between smaller competitors occurs, it is less likely to be anti-competitive. The best examples of this distinction between dominant-firm acquisitions and non-dominant firm mergers are the Comcast-TWC, Sprint-T-Mobile, and AT&T-DirecTV transactions.

Comcast and Time-Warner are the two largest firms in both residential internet service and cable television. By contrast, Sprint and T-Mobile are second-tier competitors, with the third and fourth highest market share in the mobile market, respectively. And the proposed consolidation of AT&T-DirecTV, like the Sprint-T-Mobile transaction, does not result in the elimination of a significant competitor; rather, it unites companies that primarily operate in different, though related, industries.

The AT&T and Sprint transactions still require scrutiny. With AT&T and DirecTV, there is a concern that AT&T will leverage its position in the wireless and broadband industries to expand DirecTV's U-verse video service. And, Sprint's acquisition of T-Mobile has raised concerns that consumers will see higher cell phone bills because T-Mobile will stop undercutting prices and paying to buy out its customers' contracts. Still, because AT&T and Sprint do not have market power across multiple markets, the acquisitions of those companies pose a lesser threat to consumers.

By contrast, a Comcast-TWC transaction unites companies that dominate across multiple markets. A more liberal, and perhaps more accurate, way to calculate Comcast-TWC's market share is to reverse-engineer it by subtracting its competitors' share from 100. Susan Crawford, citing Verizon, calculates that FiOS serves 14% of the country. Tim Wu calculated that Verizon FiOS has 8% market share (Google Fiber has 1%). (Crawford and Wu may both have calculated accurate figures. Crawford was calculating "coverage" or "service" area; Wu was calculating actual subscribers.)

Comcast and Time-Warner's combined market share in the extremely important Internet service market could be 75% or more. Comcast's competitors may have less than 10%, depending on how you define "high-speed" broadband. It doesn't take a mathematician or an antitrust scholar to know that consumers are losing. In sum, a straightforward application of antitrust law says the merger is in a highly concentrated market posing an extraordinary danger to consumers.

Re: Competition?

Yes, I think you're correct that there are a lot people who want high-speed residential hook-ups that have one choice, and it is Comcast or TWC. After the merger, these people will have one choice.

Regional market power is important, which is why I wrote

"These figures do not take into account regional dominance, which means that they dramatically underestimate the limited consumer choice and market consolidation across industries. Competition (or lack there of) in geographic markets is extremely significant."

Re: Competition?

How can it be less than zero? It can always get worse.

There is the concern about market share and what that does to the industry and their customers. Considering that internet access has become a de facto requirement in todays society, one can easily see why a monopoly of said resource could become problematic. If the monopoly abuses their market position, it may become necessary for regulation similar to a utility. If the government chooses not to or is unable to regulate, then the consumer will definitely suffer.

Re: Re: Competition?

How can it be less than zero? It can always get worse.

What is zero? I don't know what you're referring to here.

If the monopoly abuses their market position, it may become necessary for regulation similar to a utility. If the government chooses not to or is unable to regulate, then the consumer will definitely suffer.

I agree with you to a certain extent: regulation as a utility is one choice. However, the main point about monopolies is that they don't need to abuse their market position. Monopolies by their nature hurt consumers by charging more than the equilibrium price, which is at their marginal costs. Instead, monopolies charge a monopoly price.

In economic jargon, the monopolist gets a "monopoly surplus," consumers get a "consumer deficit," and the broader economy gets a "deadweight loss."

Re: Competition?

"A current TWC subscriber would be moving from a TWC monopoly in service to a Comcast monopoly in service."

Well, yes. But residential subscribers aren't the only customers. Internet companies are also customers.

Suppose that Facebook has a project to install a super connection between their servers and Internet providers. If there's seven internet providers with each under 20% of the market, the project is tricky to do.

But if Time Warner Comcast had 40% of the market, Facebook can choose to connect to them only and ignore the rest of the internet providers. This is a huge advantage for TWC, and kills their rivals. In addition, TWC could set a very high price for the deal, whereas in a less concentrated market each provider has much less bargaining power.

Re: Re: Re: Competition?

- I was replying to the following statement found in the post to which I responded.

"I don't think that subscribers are facing less choice due to the merger - they already have no choice"

"they don't need to abuse their market position"

- I agree, a monopoly doesn't need to abuse their position in order for it to hurt the consumers, but they usually do and it becomes much worse. And why do they do this? I don't know, because they can?

When calculating the change in Comcast HHI by absorbing TWC, you noted a Comcast HHI increase of 169 in the broadband market (because TWC market share = 13% and 13^2 = 169). But, your description of the HHI suggests the HHI change under consideration could be much larger than that.

As an example, assuming Comcast's market share for broadband was 10%, the current HHI of Comcast (CC) would be 10^2 = 100, and we already stated the current HHI of TWC as 13^2 = 169, for a total HHI of the two companies being 269. Given a merger, the new HHI for the new CC market share without TWC would be (10+13)^2 = 529. And the effective change in HHI for the entire broadband market because of the merger would be the new CC HHI minus the old CC and TWC HHIs (529 - 100 - 169 = 260). Looking at a range of different values for whatever CC's current market share might be (I don't know it), the corresponding HHI, the new HHI based on 13% increase from TWC, and what the change in HHI would be:

CC MS, CC HHI, pre-merge HHI*, merged HHI*, HHI increase

0%, 0, 0+169 = 169, (0+13)^2 = 169, 0

10%, 100, 100+169 = 269, 10+13)^2 = 529, 260

20%, 400, 400+169 = 569, (20+13)^2 = 1089, 520

50%, 2500, 2500+169 = 2669, (50+13)^2 = 3969, 1300

80%, 6400, 6400+169 = 6569, (80+13)^2 = 8649, 2080

* HHI total for just the CC and TWC components

If Comcast had about a 3.8% market share and bought out TWC, there would be an HHI increase of about 100. If they already have a market share of more than 7.7% the HHI increase would be more than 200. And the greater Comcast's market share is, the more the HHI increase due to a merger would be (a nifty feature of the HHI since there's more monopoly concern when a major player buys out a competitor than when an outside investor buys/replaces a current market competitor).

In any event, your calculations look right. There's a lot of difficulty in calculating HHI here because of how you define the market. I used the most conservative methods possible, to demonstrate that even giving Comcast the benefit of the doubt, the TWC acqusition hurts consumers.

W M Conlow

These Guys Ain't AT&T

If the Comcast/TWC merger happens, we'll have an even worse situation than AT&T. AT&T had a fair excuse. They were in charge of the entire telephone communications network in the US. They produced the hardware, they managed the network, and, frankly, did a pretty good job of it. If something broke or your service stopped, the technicians were on site right NOW, getting it fixed. A bit expensive, perhaps, but it worked well.

Comcast/TWC has no such excuse. This is a simple power grab.

Each provider, now, is a monopoly within it's own market area. Merging them will not change anything except the name. The markets will still be under monopoly control.

I see no good reason for this to be allowed. If anything, both companies should be broken up, a'la AT&T, into regional companies..

The fact that Comcast can legitimately argue that Comcast and TW don't actually compete despite both being so large and dominant in their markets should lead to charges of collusion rather than approval of their merger.

Monopoly is monopoly is monopoly

There is no way for them to sugar coat this.... after they combine bad things will happen, far too many mergers are allowed in the first place... after they merge a team of people will be assembled to break them apart again

Re: Re:

Politely though, that is a rather basic squaring error. You can't just square the difference - it has to be the difference in the final products [i.e. 10%^2 vs (10+13)%^2]. If we want to make a strong case that this is monopoly behaviour, no matter the nitty-gritty, we need to get our maths right, especialyl if it's just likely to get drowned out by the maths of small brown envelopes...

Re: Re: Re:

Politely though, that is a rather basic squaring error. You can't just square the difference - it has to be the difference in the final products [i.e. 10%^2 vs (10+13)%^2]. If we want to make a strong case that this is monopoly behaviour, no matter the nitty-gritty, we need to get our maths right, especialyl if it's just likely to get drowned out by the maths of small brown envelopes...

I'm pretty sure that that is the same "squaring error" that HH addressed. The issue is not the math being wrong, but that I ignored Comcast's market share in analyzing merger-specific harm. I should have been clearer.

But the reason I did that was because in making my "strong case" I wanted to use the most conservative figures (i.e. most Comcast-friendly) possible. The result is that the math shows the merger has the potential to harm consumers.

Completely flawed argument

It is well known that the DOJ must look forward towards competition and not just backward in these merger cases. With Wireless increasing speeds dramatically and good old DSL working on new technology to increase their broadband speeds substantially, the broadband competition will be plentiful and much much different than is written in this article.

Math Error

quote from your article: "According to conservative estimates, Time-Warner has about 13% of broadband customers in the U.S. That means that the increase in HHI resulting from the merger is 169 points."x^2 + y^2 does not equal (x + y)^2 If Comcast has 40% of a market, an HHI of 1600, and stands to gain 13%, its resulting share is 53%. By your math, the resultant HHI would be 1600 + 169 = 1769. The actual HHI would be 53^2 = 2809, a significant difference.

Re: Math Error

This has already been discussed above. But I'll explain again:

For the purposes of merger-specific harm, I have assumed Comcast has 0 market share, which is obviously not accurate. I did this for three related reasons: 1) to give Comcast the benefit of the doubt, and 2) calculating HHI with precision is extremely difficult if not impossible, and 3) again, being extremely conservative, I've only considered the company's market share for the HHI calculations--Comcast for the industry calculation and TWC's for the merger-specific calculation.

I'll explain all three using your examples:

x^2 + y^2 does not equal (x + y)^2

You are absolutely right. Except that x^2 + y^2 does equal (x + y)^2 when X is zero. For purposes of calculating the merger-specific harm I have ignored Comcast's market share, i.e. assumed that X is zero. Accordingly, I wrote "according to the Merger Guidelines, Comcast's acquisition of Time-Warner Cable would "raise significant competitive concerns and warrant scrutiny, even if Comcast didn't have dominant market share (which it does)." But I guess I didn't make this point clearly enough..

On the second point,

If Comcast has 40% of a market, an HHI of 1600, and stands to gain 13%, its resulting share is 53%. By your math, the resultant HHI would be 1600 + 169 = 1769. The actual HHI would be 53^2 = 2809, a significant difference.

You are absolutely correct that if Comcast has 40% market share and acquires a firm with 13% market share its new market share will be 53% and the change in will be > 169. However, your HHI calculation of 2809, would still be incomplete. You're only calculating the 53% of the market purportedly owned by Comcast-TWC. What about the other 47% of the market?

More importantly, the 40% and 13% figure are from two different sources. According to Comcast, Comcast has 40% of the high-speed broadband market. And, according to Reuters, Time-Warner Cable has 13% of the general broadband market. These figures are apples and oranges, which is why I didn't use them together in the same calculation. The best evidence of multiple figures that are available is from the Reuters article citing TWC's 13% market share gives Comcast 23% market share. The market I am interested in is high-speed broadband. (There are different ways of defining that, but suffice to say that "high-speed" is relative.)

Because there is no reliable way to calculate HHI, I used Comcast's admission of 40% market-share for the HHI calculation for the industry generally. And I used the best figure available for TWC's market share to figure out the change in HHI, which is 13%. These figures, in addition to being conservative on their own, ignore all other companies' market share. For the merger-specific change in HHI, that means even ignoring Comcast's share.